The IMF have published a new paper on tax incentives given by developing countries to attract foreign direct investment. They say:
Tax concessions have been employed as a central component of the development strategy in the small island states comprising the Eastern Caribbean Currency Union. This paper compares the costs of concessions in terms of revenues forgone with the benefits in terms of increased foreign direct investment. The costs are very large, while the benefits appear to be marginal at best. Forgone tax revenues range between 9¬? and 16 percent of GDP per year, whereas total foreign direct investment does not appear to depend on concessions. A rethinking of the use of concessions in the region is needed urgently.
We've long argued this. All that these incentives actually represent is a subsidy by poor and developing countries to the already wealthy shareholders of major corporations.
It's another corruption of the tax system by the Washington Consensus that has to end.
Of course, the IMF helped promote it. I hope they're taking note.
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I could not agree more, and it seems to be common sense to me.
You give up tax revenues on all qualifying FDI (and domestic investment disguised as FDI) and you only gain from the subset that would not have invested without the concessions. Then you have to deduct some crowding out effects from that.
It also promotes corruption – the people responsible for making the decisions over which companies to give concessions to rarely end up poor……
I suspect this is one reason it is popular with politicians: a nice way to get a bribe outside the country.